(PUB) Investing 2015

when it comes to bond funds, Vanguard does manage a significant portion of its in-house assets actively. Where it doesn’t manage the assets on its own, the firm has partnered with only one sub-adviser, Wellington Management. That said, there are some areas of the bond market I prefer over others, and some that I would avoid entirely. In short, I prefer corporate bonds to gov- ernment-backed bonds and would stay away from bonds with long maturities, where the risks often aren’t outweighed by the returns. To accompany my commen- tary, I created the table below to help you compare Vanguard’s bond funds side-by-side. I’ve included some of the same information you’ll find in the Performance Review , such as my advice, average maturity and yield, but I also added data showing broad alloca- tions as well as measures of risk.

Ultra-Short-Term Bond Buy. The name of the game here is low, low risk with more yield than you’ll find on a money market fund. Ultra-Short-Term Bond is young, launching in February of this year, but so far is executing its game plan nicely. The fund’s price has fluctu- ated between $9.99 and $10.01, and it currently sports a yield of 0.63%, having distributed a total of $0.02 income per share since its launch. That’s certainly not much in the way of income, but it is 250 times better than the $0.00008 a share that Prime Money Market distributed over that stretch. While I don’t believe you can ever find a suitable substitute for a money market fund when it comes to cash that you intend to spend in the near future—and Ultra-Short-Term Bond is not a money market fund—I do think that investors who can handle small changes in price may indeed find this a good alternative.

Short-TermTreasury Sell. Short-Term Federal Sell. Short-Term Government ETF Sell. Short-Term Bond Index Hold. Short-Term Corporate ETF Buy. Short-Term Invest.-Gr. Buy. In the past, I have recommended that short-duration funds can serve just as well as, if not better than, money market funds in your portfolio, particularly if it’s money that you won’t be spending tomorrow. I believe most investors are well-advised to own both a money fund for day-to-day spending and a short- term bond fund for liquid assets that aren’t necessarily needed right away and can stand to be subjected to a bit more risk for a lot more total return over time. This is still my recommendation; I just don’t believe all of Vanguard’s short- term funds are equally up to the task. It wasn’t that long ago that I de- scribed Vanguard’s three short-term >

The Many Shapes and Sizes of Vanguard’s Bond Funds —————— STATS ——————

—————— SECTOR BREAKOUT —————— —— RISK ——

Avg. Maturity (years)

Duration (years) SEC Yield

Treas./ Agency

Gov’t MBS* Credit** Foreign Cash MCL

Advice

Date

Ultra-Short-Term Bond Short-Term Funds Short-Term Treasury Short-Term Federal

Buy

1.1

1.0 0.63% 22% 0% 53% 1% 24% -0.1% Jul-15

Sell Sell Sell Hold Buy Buy Sell Sell Hold Hold Buy Buy Sell Sell Sell Hold Hold Hold Hold Hold Hold Buy Sell Buy Hold

2.5 2.7 1.9 2.8 3.1 3.0 5.8 5.6 7.2 8.0 6.4 7.5

2.3 0.60% 100% 5% 0% 0% -5% -2.2% Apr-94 2.3 0.74% 89% 16% 0% 0% -4% -2.5% May-94 1.9 0.60% 99% 0% 1% 0% 0% -1.5% Apr-94 2.7 1.13% 66% 0% 26% 8% 0% -1.8% May-04 2.6 1.83% 11% 0% 82% 7% 0% -7.6% Nov-08 2.8 1.98% 0% 0% 100% 0% 0% -9.7% Oct-08 5.3 1.44% 100% 5% 0% 0% -4% -6.5% Nov-94 5.2 1.54% 100% 0% 1% 0% 0% -4.5% Jul-03 6.5 2.56% 52% 0% 41% 8% 0% -8.9% Oct-08 5.7 2.12% 45% 17% 32% 7% 0% -5.8% Sep-87 5.5 2.77% 7% 0% 90% 3% 0% -14.2% Oct-08 6.4 3.51% 0% 0% 100% 0% 0% -17.7% Oct-08 16.3 2.57% 99% 5% 0% 0% -4% -16.7% Dec-13 16.9 2.70% 100% 0% 0% 0% 0% -16.1% Dec-13 14.7 4.01% 37% 0% 51% 12% 0% -11.9% Oct-08 13.1 4.09% 3% 0% 94% 2% 1% -16.8% Oct-08 13.6 4.84% 0% 0% 100% 0% 0% -22.5% Oct-08 2.6 0.17% 100% 0% 0% 0% 0% -8.0% Nov-08 8.1 0.27% 99% 0% 1% 0% 0% -12.5% Oct-08 4.3 2.22% 2% 96% 2% 0% 0% -12.3% Sep-81 4.1 1.52% 0% 98% 2% 0% 0% -4.0% Apr-94 4.3 5.60% 2% 0% 98% 0% 0% -28.9% Oct-08 24.7 2.95% 100% 0% 0% 0% 0% -37.0% Mar-10 6.4 4.67% 0% 0% 0% 100% 0% -34.5% Aug-98 7.9 0.98% 0% 0% 29% 71% 0% -6.3% Aug-94

Short-Term Government ETF Short-Term Bond Index Short-Term Investment-Grade Short-Term Corporate ETF Intermediate-Term Funds Intermediate-Term Treasury Intermediate-Term Government ETF Intermediate-Term Bond Index Intermediate-Term Investment-Grade Intermediate-Term Corporate ETF Total Bond Market Index

Long-Term Funds Long-Term Treasury

24.9 24.6 24.3 23.1 24.0

Long-Term Government ETF Long-Term Bond Index Long-Term Investment-Grade Long-Term Corporate ETF

Specialty Funds Short-Term Inflation-Protected Index Inflation-Protected Securities

2.7 8.5 6.7 6.4 6.5

GNMA

Mortgage-Backed Securities ETF

High-Yield Corporate

Extended Duration Treasury ETF Emerging Markets Gov’t Bond Index Total International Bond Index

25.1 10.4

9.2

*MBS is shorthand for mortgage-backed securities (see page 7 for details on MBS). **Credit is a combination of Corporate (Finance, Industrial and Utilities), Asset-Backed, Commercial MBS and Other. Maturity, SEC Yield and Risk data as of 8/31/15. All other data as of 7/31/15.

The Independent Adviser for Vanguard Investors • September 2015 • 5

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